Thank you for the opportunity to provide our feedback to the EBA consultation on its Guidelines regarding the types of exposures to be associated with high risk under Article 128(3) of Regulation (EU) No 575 (CRR). We would like to share with you the following reflections that we hope will be taken into account by the EBA.

1. General comments

Article 128 (3) of CRR provides a mandate to EBA to issue guidelines specifying which types of exposures other than exposures referred to in Article 128 (2) are associated with particularly high risk and under which circumstances. However, EBA on its own initiative has decided to include in the draft Guidelines clarifications on the notion of certain exposures referred to in Article 128 (2), i.e. investments in venture capital firms and investments in private equity.

ESBG does not believe that publication of these draft guidelines is necessary. The mandate to develop guidelines dates back to 2013, i.e. it is almost five years old. This shows that the supervisors, too, evidently do not assign this topic a high priority. Nevertheless, taken into account the debate that is taking place between supervisors and credit institutions on the classification of all land acquisition, development and construction (ADC) exposures as speculative immovable property financing, ESBG considers that some clarification on this regard should be included in the Guidelines.

The classification of all ADC exposures as speculative immovable property financing without discriminating against different categories of credit quality of the property developer lacks of risk sensibility since it implies that credit institutions under Standardised Approach for credit risk shall apply a 150% risk weight to these exposures regardless of the credit quality of the client, the mortgage guarantees provided and the level of reorganisation of the transaction.

In ESBG’s opinion, the problem is the definition of speculative immovable property financing in Article 4 (79) of CRR: “loans for the purposes of the acquisition of or development or construction on land in relation to immovable property, or of and in relation to such property, with the intention of reselling for profit”. From the perspective of the literality of the standard, the connection of the term "speculative" with the process of transformation linked to a normal real estate development is queried since this process incorporates added value to the land acquired over several years. Regarding the term “reselling” the same can be said since it is an expression hardly applicable when the nature of the property bought (land) and that of the property sold (flats, buildings) are completely different.

Moreover, applying a very high risk weight, as 150%, to all exposures to immovable development (without discrimination) seems disproportionate particularly in such transactions soundly guaranteed and/or based in low risk entrepreneurial projects (developments with high level of sales off-plan).

On this regard, we believe that it is necessary to mention the treatment given by the finalisation of Basel III to ADC lending, where these exposures will be risk-weighted at 150% unless certain criteria are meet. Thereby ADC exposures to residential real estate may be risk weighted at 100% if they meet certain criteria (ex. pre-sale or pre-lease contracts amount to a significant portion of total contracts or substantial equity at risk, etc.). Including some explanation in the Guidelines in this way will be welcome.

In conclusion, ESBG would like to stress that clarifications on speculative immovable property financing are needed in order to not prejudice an economic sector against others and avoid that credit institutions limit financing to this sector with the aim of reduce the impact on their solvency ratios.

2. Specific comments

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Paragraph 3

In ESBG’s opinion, the current specification of what is to be considered as high risk with respect to private equity in the sense of Art. 128(c) CRR should be defined clearly in order to avoid misunder-standing or room for interpretation:

“3. Institutions should consider that direct investments in private equity or private equity funds re-ferred to in point (c) of Article 128 of Regulation (EU) No. 575/2013 cover at least any investment meeting both of the following conditions (…)”

In our view, the current definition leaves in fact room for interpretation whether any exposures relat-ed to investments, i.e. indirect in private equities, are to be considered as high risk in the sense of this article.

​Paragraph 5. (b)

Regarding the consideration of certain specialised lending as high risk exposure in the draft Guidelines (paragraph 5 (b)) and given that the finalisation of Basel III provides an specific treatment for specialised lending, ESBG question, in line with the Basel III argument above, the logic behind implementing rules, and specially charges, that are already known as being modified/amended. From our perspective, this will unnecessarily surcharge entities and generate unjustified capital volatility.

Paragraph 7

According to paragraph 7 of the draft Guidelines, “All equity exposures should be considered whether to be classified as high risk if the risk weight for any debt exposure to the same issuer is 150% or where any debt of such issuer would receive a 150% risk weight if these debt obligations were exposures of the institution”. In ESBG’s opinion, the treatment proposed is very prejudicial for these equity exposures, particularly for ADC listed companies since all ADC lending has been ask by supervisor to be considered as high risk exposure. Due to this we call for its removal.

In case the former was not attended, the following statement needs to be clarified: “(...) or where any debt of such issuer would receive a 150% risk weight if these debt obligations were exposures of the institution”. It will be hardly difficult for credit institutions to identify that case.

​About ESBG (European Savings and Retail Banking Group)

ESBG represents the locally focused European banking sector, helping savings and retail banks in 20 European countries strengthen their unique approach that focuses on providing service to local communities and boosting SMEs. An advocate for a proportionate approach to banking rules, ESBG unites at EU level some 1,000 banks, which together employ 780,000 people driven to innovate at 56,000 outlets. ESBG members have total assets of €6.2 trillion, provide €500 billion in SME loans, and serve 150 million Europeans seeking retail banking services. ESBG members are committed to further unleash the promise of sustainable, responsible 21st century banking.